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ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting

Which of the following is a limitation of general purpose financial statements as a source of information for investors?

A key limitation is that financial statements are mostly based on past transactions and include estimates, so they cannot meet every user's information needs. They are not just for management, do include cash flow information, and must follow an accounting framework such as IFRS.

  1. AThey are largely based on historical transactions and cannot meet all the information needs of every userCorrect
  2. BThey are prepared only for the benefit of management
  3. CThey exclude statements of cash flows because cash is not relevant
  4. DThey are not required to follow any accounting framework

Explanation

Financial statements mostly reflect past events, include estimates and judgements, and cannot satisfy every user's needs. The other options are false: they are not management-only, cash flow information is included, and they follow IFRS.

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